Forget Canada and Buy U.S. Pot Stocks, Says This Investment Firm

Few industries have had investors seeing green
quite like the legal cannabis industry over the past couple of
years. Investors who had the foresight, wherewithal, and luck to
buy into some of the most popular marijuana stocks at the beginning
of 2016 could find themselves up well in excess of
1,000%.

There's little denying the opportunity that could
await investors. Canadian legal weed sales are expected to reach as
high as $6 billion by 2022, with various Wall Street investment
firms projecting that $50 billion to $75 billion in global annual
sales are possible by the end of the upcoming decade. This makes
cannabis a potentially once-in-a-generation investment
opportunity.

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A black silhouette of the United States,
partially filled in with cannabis baggies, rolled joints, and a
scale.

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U.S. marijuana stocks are the place to
be, according to this Wall Street firm

But deciding where to park your money within the
marijuana industry is a topic of great debate. Whereas most Wall
Street firms favor the well-established pot stocks to our north
that have laid the infrastructure to be successful in domestic and
foreign markets, one Wall Street investment firm believes you'd be
smarter to buy U.S. pot stocks instead.

A recent research note from Compass Point
Research & Trading analysts Rommel Dionisio and Isaac
Boltansky, courtesy of
Barron's, says U.S. pot stocks look considerably more
attractive than Canadian pot stocks. Specifically, the duo sees the
United States producing nearly 80% of the world's legal cannabis
sales in 2019, and they note that the sales multiple attached to
Canadian stocks relative to U.S. marijuana stocks makes little
sense.

At the time the research note was released, the
combined market caps of five of Canada's leading producers â
Canopy Growth, Aurora Cannabis,
Cronos Group, Tilray, and
HEXO â was $36 billion. Yet, aggregate 2020
sales for this group should only hit $2.7 billion, per Dionisio and
Boltansky.

Meanwhile, the combined market caps of the top-10
U.S. pot stocks equates to just $17 billion, but these companies
expect to see aggregate sales of $4.8 billion in 2020. Thus,
Canadian pot stocks are, as a whole, trading at more than 13 times
2020 sales, whereas U.S. pot stocks are valued at roughly 3.5 times
next year's sales.

The duo also notes that while marijuana remains
an illicit drug at the federal level, some 30% of Americans now
live in recreational-legal states following the passage of a recreational
cannabis bill in the Illinois Legislature, which at this point
is merely waiting for Gov. J.B. Pritzker, a Democrat, who intends
to sign the bill soon.

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These four U.S. pot stocks may have more
than 60% upside

So, which U.S. marijuana stocks should investors
consider buying? According to Compass Point, Curaleaf
Holdings(NASDAQOTH: CURLF), Cresco
Labs(NASDAQOTH: CRLBF), Acreage
Holdings(NASDAQOTH: ACRGF), and
Green Thumb Industries(NASDAQOTH:
GTBIF) are all rated as a buy, with each company having more
than 60% upside from current levels.

In the here and now, no vertically integrated
dispensary operator is bigger than
Curaleaf, which has more than half of its existing stores open
in Florida. It currently operates 45 open dispensaries in a dozen
states, along with 12 cultivation sites and 11 processing
facilities, allowing Curaleaf to control its supply from seed to
sale. Curaleaf gained significant notoriety when its
cannabidiol-infused topical products were chosen by CVS
Health to be placed into approximately 800 stores in eight
states earlier this year.

Cresco Labs' claim to fame could be its impending
acquisition of Origin House(NASDAQOTH:
ORHOF) in an all-stock deal that could top $800 million.
Although Cresco is a vertically integrated dispensary operator with
more than 50 retail licenses in its portfolio (on a pro forma
basis), the purchase of Origin
House, a key cannabis distribution license-holder in
California, will allow Cresco to get its in-house-branded products
into more than 500 California dispensaries. Since California is the
crown jewel of the marijuana legalization movement, Cresco Labs is
looking forward to incorporating Origin House into the fold.

Acreage Holdings has found itself in the news for
a variety of reasons. As a vertically integrated dispensary
operator, it is projected to lead all of its peers in terms of
multistate presence. Assuming all of its announced acquisitions
close, Acreage will have a retail, processing, or cultivation
presence in 20 states. It's also the U.S. dispensary operator that
Canopy Growth agreed to buy for $3.4
billion, contingent on the U.S. federal government legalizing
marijuana.

Lastly, there's Green Thumb Industries -- which,
as you can probably guess from the theme so far, is a vertically
integrated, multistate dispensary operator. Green Thumb, which
brands its retail locations under the Rise or Essence name, has
just over a dozen manufacturing facilities and licenses to open as
many as 89 retail stores in 12 states. Recently, Green Thumb
completed the acquisition
of Integral Associates, which owns the Essence brand of retail
stores in Nevada, a potential billion-dollar cannabis market.

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Two possible faults in Compass Point's
research

Although I don't dispute Dionisio's and
Boltanksy's findings that U.S. pot stocks are cheaper on the basis
of forward price-to-sales, their analysis overlooks two key
risks.

First, there's that little fact that the federal
government has held firm on its belief that cannabis is a Schedule
I drug. This means it's entirely illegal, prone to abuse, and has
no recognized medical benefits.

Even though approximately 30% of Americans now
live in a recreationally legal state, this doesn't factor in
political risks. Sure, we've witnessed sentiment toward marijuana
improve considerably among the public over the past decade, but
this isn't necessarily the case with Congress. As long as
Republicans control at least one house of Congress, there remains
significant risk to the
chances of reform at the federal and state levels.

The second concern here is that, despite rapid
sales growth, Compass Point may be overlooking the ramp-up in
spending that could be necessary to facilitate seed-to-sale
expansion in multiple states.

For example, the reason vertically integrated pot
company Trulieve Cannabis has been so
profitable is its laser focus on the Florida market. Of its 30 open
dispensaries, 28 are in its home market. By building its brand in
Florida and not overextending its reach, at least in the early
going, Trulieve has easily been one of the most profitable
U.S. marijuana stocks.

Comparatively, trying to expand into a dozen or
more states at once could be incredibly costly. The brand building
and marketing associated with such a move will be costly and
time-consuming, which Dionisio and Boltansky may not be fully
factoring in.

Only time will tell if U.S. pot stocks are the
deal that Compass Point makes them out to be.

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